We came away from MBM’s 4Q14 results’ briefing with our NEUTRAL view unchanged premised on the group’s mixed outlook. Management shared their views on: (i) 4Q14 results’ analysis, (ii) headwinds in the motor-trading division, and (iii) the outlook of its auto parts manufacturing division. On our take, while we see no major excitement across all divisions, we still view the potential stronger Perodua sales (through 20% associate stake, contributing c.89% to the group’s FY15E PBT) as the saving grace. Post-briefing, we tweaked our FY15E NP marginally upwards by +1% for house-keeping purposes. We have also introduced our FY16E NP of RM150.1m (+9% YoY) with earnings growth mainly premised its OMI alloy wheel division turning profitable. Subsequently, our TP has been raised to RM3.52 from RM3.06 as we have also ascribed a higher targeted 10.0x PER (from 9.0x), which is at its 3-year average forward PER in lieu of its improving earnings outlook.

Maintain MARKET PERFORM. Further details on the 4Q14 results. On a YoY basis, the 4Q14 revenue remained pallid at RM417.7m (-0.8%) with weaker revenue seen across all segments. On a closer look at the lion’s share revenue contributor, namely Motor vehicles trading (-0.1%, commanding c.90% of total revenue), marginal sales growth (+0.9%) from DMMS, one of the subsidiaries, which trades Perodua vehicles, were negated by other subsidiaries namely DMSB which deal in Daihatsu & Hino trucks (-3.8%) and Federal Auto, which deal in continental models (-6.8%), no thanks to the muted consumer spending. Meanwhile, auto parts manufacturing (commanding c.10% of total revenue) declined by 7.4% due to lower deliveries with lower demand from major car makers. While the group’s EBIT declined by 79%, dragged down by ongoing high fixed cost, PBT jumped 20% driven by its associate Perodua (+40%) stemming from the overwhelming responses for Perodua Axia.

Headwinds in the motor trading division in 1Q15. Management expects a challenging 1Q15 in its motor trading division (contributing 90% of the group’s revenue), due to the cautious consumer sentiment amidst uncertainties over car prices from the GST implementation. Meanwhile, we also see margin compressions to be the key trend for car dealers as they are aggressively paring down old inventories in avoidance of additional tax that might arise post GST implementation. While we understand that the growing aftersales business could partly cushion off the downfalls, this does not change our conservative view given its marginal contribution (of c.30%) to the earnings of motor trading.

Auto parts manufacturing division gaining traction. While we see no major excitement across this division, we take comfort from the management’s view that its OMI alloy wheel operation should see narrower losses in FY15 (recall that OMI alloy registered LBT of c.RM25m in FY14), further with operational breakeven to be seen in FY16. Note that the management’s optimism stems from the higher sales volume of 300k (over 500k capacity) with several contracts already secured from OEMs and REMs in FY15 with more contracts expected in FY16. Capex-wise, it will be RM15m for the additional 250k additional capacity in 4Q15.

Associate earnings still the major bottomline driver. Perodua (20% owned by MBMR) had recently guided its 2015 total sales to be at 208k units (vs. our current 2015 forecast of 205k units), a decent 6% growth visa- vis total Malaysia’s TIV of 2% by MAA. We believe the forecasts are justified with; (i) consumers’ preference towards more affordable vehicles in light of rising cost of living, (ii) >70k bookings that Perodua Axia (comparable variant with 15% cheaper than a Viva) garnered since its launching in Sept14. 

Source: Kenanga